"Towards a Comparative Institutional Analysis"

by Masahiko Aoki

Review:

As the author points out at the outset, the importance of "institutions" has now been widely recognized, even among economists who have traditionally focused on the market mechanism as the only institution that matters. This book is an attempt to deal with institutions directly by using a game-theoretic approach and defining an institution as an equilibrium outcome of a game. More specifically, two problems are being addressed: (1) "the synchronic problem, whereby the goal is to understand the complexity and diversity of overall institutional arrangements across the economies as an instance of multiple equilibria of some kind," and (2) "the diachronic problem, whereby the goal is to understand the mechanism of institutional evolution/change in a framework consistent with an equilibrium view of institutions, but allowing for the possibility of the emergence of novelty."

In a world of multiple equilibria, it is clear that initial conditions and historical time paths matter. We, therefore, need comparative and historical analyses to understand actual outcomes in the game-theoretic framework. In this sense, what the author is really attempting to do in this book is to provide the groundwork for "comparative institutional analysis," as the title of the book indicates.

This kind of analysis is particularly relevant and important in understanding the crisis that the Japanese economy is currently facing, and one whole chapter (Chapter 13) is devoted to the case of the Japanese main bank system to illustrate how an institutional crisis evolves. There are many other examples and case studies that highlight the effectiveness and usefulness of this approach. In this context, it may be of interest to note that Professor Aoki delivered a commencement address entitled "The Value of Tacit Knowledge that You Gain in a Diverse Student Body" at the International University of Japan on June 27, 2001 (See http://www.glocom.org/opinions/essays/200107_aoki_value/l), which might be regarded as an application of his analysis in Chapter 12 on the Value of Tacit Knowledge as well as Chapter 14 on the Silicon Valley model.

According to the author, this book is the first volume in the Comparative Institutional Analysis series. We can hardly wait for subsequent volumes in this extraordinary series. The following is a list of contents in this volume:

1. What Are Institutions? How Should We Approach Them?
   I PROTO-INSTITUTIONS: INTRODUCING BASIC TYPES
2. Customary Property Rights and Community Norms
3. The Private-Ordered Governance of Trade, Contracts, and Markets
4. Organized Architecture and Governance
5. The Co-evolution of Organizational Conventions and Human Asset Types
6. States as Stable Equilibria in the Polity Domain
   II A GAME-THEORETIC FRAMEWORK FOR INSTITUIONAL ANALYSIS
7. A Game-Theoretic Concept of Institution
8. The Synchronic Structure of Institutional Linkage
9. Subjective Game Models and the Mechanism of Institutional Change
10. Diachronic Linkages of Institutions
    III AN ANALYSIS OF INSTITUTIONAL DIVERSITY
11. Comparative Corporate Governance
12. Types of Relational Financing and the Value of Tacit Knowledge
13. Institutional Complementarities, Co-emergence, and Crisis: The Case of the Japanese Main Bank System
14. Institutional Innovation of the Silicon Valley Model in the Product System Development
15. Epilogue: Why Does Institutional Diversity Continue to Evolve?